Connor Corn Chip Corporation has the following securities outstanding in the market:

1.                 Connor Corn Chip Corporation has the following

securities outstanding in the market:

Bonds:                        100 bonds with par value of $1000
7% coupon rate, 7 years to maturity
market price = $1055

Preferred Stock:         500 shares with par value of $100
10% dividend rate
market price = $105

Common Stock:         1000 shares with par value of $20
last dividend paid = $3.00
market price = $45
average market return = 12%
risk-free return = 4%

Connor Corn Chips has two divisions: manufacturing and packaging. The manufacturing division accounts for 80% of the firm’s assets and has a beta coefficient of 1.2. The firm’s remaining assets are used in the packaging division that is considered less risky with a beta coefficient of .825. Connor has an expected growth rate of 5% and a tax rate of 30%.

a.                  Calculate Connor’s component cost of debt.                               (6 points)

b.                 Calculate Connor’s component cost of preferred stock.              (3 points)

c.                  Calculate Connor’s component cost of common stock using as many methods as possible.                                                                         (9 points)

d.                 Calculate Connor’s weighted average cost of capital.                 (8 points)

e.                  Assume that the weighted average cost of capital you calculated in (d) is lower than Connor’s weighted average cost of capital used last quarter. How would you expect this to affect:                                           (4 points)

i.                   the acceptance rate for new capital projects
ii.                 the value of the firm

Note: Show all calculations on Excel. Explanations to be shown on a word document. There are no attachment files.

 
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